Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/183333 
Year of Publication: 
2018
Series/Report no.: 
ECB Working Paper No. 2151
Publisher: 
European Central Bank (ECB), Frankfurt a. M.
Abstract: 
This paper shows that there are two regularities in foreign exchange markets in advanced countries with flexible regimes. First, real exchange rates are mean-reverting, as implied by the Purchasing Power Parity model. Second, the adjustment takes place via nominal exchange rates. These features of the data can be exploited, even on the back of a napkin, to generate nominal exchange rate forecasts that outperform the random walk. The secret is to avoid estimating the pace of mean reversion and assume that relative prices are unchanged. Direct forecasting or panel data techniques are better than the random walk but fail to beat this simple calibrated model.
Subjects: 
exchange rates
forecasting
Purchasing Power Parity
panel data
mean reversion
JEL: 
C32
F31
F37
F41
Persistent Identifier of the first edition: 
ISBN: 
978-92-899-3256-1
Document Type: 
Working Paper

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